Mexico’s Latest Fiscal Reform Falls Short on Accountability

Oct 21, 2013

This post was written by Rocio Campos, Program Officer at the International Budget Partnership.

On 8 September 2013 Mexican President Enrique Peña Nieto presented an initiative for fiscal reform to Congress. The proposed fiscal reform is the latest in a number of agreements and efforts to realize the commitments made in the Pacto por Mexico (Pact for Mexico), which was signed in January 2013. Under the Pact, the country’s leading political parties (Partido Revolucionario Institucional, Partido Acción Nacional, Partido de la Revolución Democrática, and Partido Verde Ecologista de México) committed to promoting economic growth, reducing poverty and social inequality, and consolidating democracy. In particular, the reform seeks to address Mexico’s abysmal record on reducing poverty levels. According to Luis Videgaray from the Mexican Ministry of Finance, 45.5 percent of Mexicans live in poverty, a figure that has not changed in 30 years.

The revenue proposals in the fiscal reform respond to Mexico’s poor performance on revenue collection (one of the worst in Latin America) and its dependency on revenues from the hydrocarbon sector. To increase revenues the reform proposes to eliminate some tax deductions and to establish new sales taxes, capital gains taxes, and taxes on activities that harm the environment. Also included in the proposed reform are new taxes on buying a pet (along with pet food), private school, and renting or buying a home. The current tax on gas for cars and trucks will remain the same. In order to address social inequality, the reform also seeks to make the tax system more progressive (i.e., those who earn more, pay a higher share of their income), to create unemployment insurance, and to lower social security fees on low-wage workers. It also ensures that no new taxes will apply to staple foods (there are some on soda and chewing gum) or medicine, a fact that was very well received across the social spectrum

The fiscal reform proposal also includes some provisions that will make the disbursement and spending of funds more efficient, which can have significant impacts on people’s lives. For example, currently individual states manage the health care resources that they receive from the central government according to state laws, with little to no control or oversight by the federal government. This has led to what the fiscal reform describes as “obstacles,” but what are in fact serious problems of misuse of public funds by state level authorities. This is what happened in Chiapas — one of the poorest states in Mexico — where the state government waived public bids for the purchase of medicines. This resulted in the state paying highly inflated prices for medicines, sometimes as much as 90 percent above the authorized prices. For instance, a lot of vitamin A has a unit cost of 36 cents, but the Chiapas authorities paid 32 pesos for one — over 100 times higher than the unit cost. This incident has received substantial media scrutiny as it wasn’t just an irregularity, it threatened the health of millions of beneficiaries. The proposed fiscal reform includes provisions to increase control at the federal level, and streamline disbursements to state agencies.

However, while increasing the financial resources available to the government and addressing inefficiencies in disbursement and spending systems have the potential to promote a healthier economy, ensure human rights, narrow economic inequality, and reduce poverty, as stipulated in the Pact, that potential will only be realized if the additional revenue is spent efficiently, which requires transparent, responsive, and accountable budgeting and governance. In other words, more money does not automatically translate into better public services, citizens and civil society and formal oversight institutions need access to comprehensive and timely budget information and opportunities to engage in budget decisions and to monitor how budget policies are carried out on the ground. Such systems empower informal and formal oversight actors, which is critical to ensuring that public funds are used effectively to meet the public’s needs, particularly when the lack of such oversight provides opportunities for corruption and other misuse of public money.

Unfortunately the proposed fiscal reforms do not address how to improve accountability at the state or federal level, of which the latter would have additional control but not necessarily additional accountability.Now it is Congress’ turn to discuss and decide which aspects of the reform will be approved as they are, and which aspects need to be discussed further. These discussions should include supporting measures to promote greater opportunities for formal and informal oversight of public money at federal and state level.

While the reform is awaiting final approval from the Senate, it was already voted on in the Chamber of Representatives. Several of the proposals, such as taxes on mortgages and private schools, were not approved. Check this space for future updates.